Effects of the corona crisis on commercial and residential leases

23.03.2020

The current corona crisis raises a number of issues in terms of tenancy law. Among other things, questions arise from the fact that tenants may not be able to pay part or all of their rent and thus landlords could also find themselves in considerable difficulties, specifically where they are heavily dependent on rental income, for example because they have to repay relevant financing.

Particularly freelancers, self-employed individuals, artists, but also restaurateurs might find it difficult to pay rent at the turn of the month due to the loss of fees or income. It is also not entirely unrealistic that this situation will not be reduced to just one month.

Against this backdrop, tenants and landlords are considering how to deal with this situation.

Some clarification has been provided by the Act on Mitigating the Consequences of the Covid-19 Pandemic adopted by the German parliament on March 27. The legislator confirmed the jurisdiction of the Federal Court of Justice that the risk of use and profit must in principle be borne by lessees. The “Pandemic Act” therefore does not provide for any general exceptions to the payment of rent. Rental debts incurred in the period from April 1, 2020 to June 30, 2020 due to the pandemic, however, do not entitle landlords or lessors to terminate the rental or lease. The previous statutory provision according to which the landlord may terminate the lease after two consecutive rents have been missed is therefore suspended for the time being.

It is not enough for lessees, however, to invoke the pandemic. Rather, they must make it plausible that the reason for non-payment is due to the pandemic. Commercial lessees will be able to do so without any problems if the operation of their company has been banned or considerably restricted by legal ordinance or official decree as part of combating the SARS-CoV-2 virus. Other commercial lessees would have to present facts proving their sales decline due to the corona crisis (lack of supply, quarantine or similar). In residential tenancy law, a certificate from the employer or the proof of State benefits could be sufficient.

In general, therefore, rent must be paid. Under no circumstances should rent payments therefore be deferred without comment.  

It should also be borne in mind that, firstly, rent in arrears is to be paid by June 03, 2022 and, secondly, that the default rule has not been abolished. This means that lessees must also pay statutory default interest for the entire period of non-payment.

The parties to a lease agreement are therefore advised to deal with each other fairly and constructively. In accordance with the prevailing idea of solidarity, pragmatic and constructive solutions should be found that enable both parties to continue the original contract. Consequently, it may be useful for both parties to agree on a deferral and instalment payment scheme that takes into account the interests of lessees and lessors.

For residential leases, tenants in financial difficulties may wish to consider whether they might be entitled to housing benefit claims, which currently appear to be less bureaucratic to apply for and claim.

In conclusion, there is currently no universal solution, except for the principle of generally contacting the landlord in the event of payment difficulties and to communicate any such difficulties in a constructive manner.

Operating duty in the lease

Many commercial leases provide for the duty of lessees to operate the business, for example in the case of a hotels or restaurants or of “anchor tenants” in shopping centers. It should be noted that such provisions will retain their effectiveness in principle as long as no orders by the authorities have been issued. The simple argument of a decline in sales is not sufficient to counter the operating duty.

The situation is different if restaurateurs or hotels are forced to close. In such events, tenants or operators are unlikely to be guilty of infringing the lease if they are complying with orders by the authorities.

It is always necessary, however, to review the individual lease to gain clarity about the rights and obligations thereunder.

Tradesperson appointments

In light of the recent events, this is another topic that has gained in importance. If landlords have already arranged an upcoming appointment with a tradesperson prior to the crisis, tenants are obligated to admit them to the premises, for example to maintain the heating equipment, but tenants may still cancel the appointment if they fear an infection or particularly if they are members of the risk group. Also in this case, tenants should openly communicate the reason for the termination to the landlord so as not to provoke a termination.

Since the corona crisis and in particular its consequences are uncharted territory for the judiciary as well, many cases cannot be clearly answered. Nonetheless, it will be possible to work out individual solutions for many problems. We are available to assist our clients in all of these matters.

Status: March 27, 2020

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